Teradyne, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended April 3, 2016; comparisons are with the three months ended April 5, 2015. Teradyne supplies automated test equipment and collaborative robots across semiconductor, system, wireless, and industrial automation markets. Universal Robots, acquired in June 2015, is included in Industrial Automation.
Financial performance and liquidity
| Metric | Q1 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $431.0 million | $342.4 million | Up 25.9% |
| Gross profit / margin | $230.3 million / 53.4% | $192.4 million / 56.2% | Margin down 2.8 points |
| Operating income / margin | $56.1 million / 13.0% | $35.1 million / 10.3% | Income up $21.0 million |
| Net income / diluted EPS | $50.0 million / $0.24 | $32.8 million / $0.15 | Net income up 52.5% |
| Operating cash flow | $26.7 million | $37.5 million | Down $10.8 million |
- Products generated $358.1 million of revenue and services $72.9 million. Semiconductor Test revenue was $340.3 million, System Test $53.7 million, Wireless Test $20.3 million, and Industrial Automation $16.7 million. The prior-year period had no Industrial Automation segment revenue.
- Gross margin declined mainly because of unfavorable product mix, higher Storage Test sales, and lower Wireless Test sales; higher product volume partly offset the decline. Operating income rose despite higher acquired-intangible amortization and acquisition-related costs.
- Net income benefited from a lower effective tax rate: 12.6%, versus 22.7% a year earlier. The filing cites foreign earnings taxed at lower rates, U.S. R&D credits, and $2.5 million of discrete tax benefits, partly offset by transfer-pricing tax reserves.
- Operating cash flow was pressured by working-capital use, including higher receivables and lower accrued compensation and deferred revenue. Capital expenditures were $20.3 million.
- Cash and cash equivalents were $319.4 million; marketable securities totaled $656.1 million, for combined cash and securities of $975.4 million. This combined balance decreased $32.9 million during the quarter. Current assets were $1.24 billion and current liabilities $344.5 million.
- Teradyne reported no borrowings under its $350 million revolving credit facility as of May 13, 2016, and was in compliance with its covenants at April 3. The filing reports no other outstanding debt balance.
Material changes and management commentary
- Semiconductor Test revenue increased $69.4 million (25.6%), primarily on higher application-processor and image-sensor demand. System Test revenue rose $16.3 million (43.6%), primarily from cloud-storage hard-disk-drive testers.
- Wireless Test revenue fell $13.8 million (40.5%), primarily because of lower cellular-test sales to its largest customer. Management notes that customer concentration makes quarterly Wireless Test revenue dependent on that customer’s capacity plans.
- Wireless Test reported a $20.1 million pretax loss, compared with a $10.4 million loss a year earlier. Industrial Automation reported a $7.2 million pretax loss, primarily due to acquired-intangible amortization.
- Inventory provisions increased to $4.3 million from $1.4 million, largely due to downward revisions to forecast demand. The company had $122.9 million of inventory previously written down or written off.
- Management describes the business as cyclical and historically affected by semiconductor and electronics demand swings. It expects the even/odd-year mobility demand pattern to lessen over time, citing slower smartphone unit growth, greater device complexity, and reduced impact from parallel testing.
Outlook, risks, contingencies, and unusual items
- No numerical revenue or earnings guidance is provided in the filing. Management expects cash, cash equivalents, and marketable securities to be sufficient for dividends, the authorized repurchase program, working capital, and expenditures for at least the next 12 months.
- Teradyne intended to repurchase $100 million to $200 million of stock in 2016. It repurchased $28.0 million during the quarter and paid $12.3 million in dividends; future distributions remain at the board’s discretion. The quarterly dividend was $0.06 per share.
- On April 16, 2016, an earthquake heavily damaged the company’s Kumamoto, Japan facility. Teradyne was assessing the impact and temporarily transferring operations. Inventory and fixed assets at the site had a net book value of approximately $17 million; earthquake insurance was $10 million, subject to an approximately $2.5 million deductible. Management did not expect a significant manufacturing or sales impact, but noted possible short-term disruption and repair costs.
- Purchase commitments totaled approximately $235.3 million, of which $233.7 million was due within one year. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect.
- Universal Robots acquisition-related contingent consideration included a $15 million payment during the quarter and a $23.6 million remaining fair-value liability. The filing also records a $1.2 million increase in its fair value. The liability is based partly on forecast revenue and other unobservable valuation inputs.
- Teradyne held $514 million of cash, cash equivalents, and marketable securities outside the United States; repatriation would incur additional taxes, which the company said it could not practicably estimate. The filing also identifies transfer-pricing exposure and $35.2 million of reserves for uncertain tax positions.
- Management identified potential goodwill impairment risk in Wireless Test if market size or Teradyne’s share declines further. It reported that the most recent impairment testing showed fair value at least 20% above carrying value.
Important facts for investors to verify
- Whether the Kumamoto facility’s damage, restoration timeline, insurance recovery, and related costs differ from the initial estimates.
- Whether semiconductor demand and product mix sustain revenue and margins, and whether elevated inventory provisions recur.
- Whether Wireless Test’s largest-customer concentration continues to pressure segment revenue and profitability.
- Whether Industrial Automation improves profitability as acquisition-related amortization and integration effects evolve.
- Whether planned 2016 repurchases and dividends remain consistent with liquidity needs, including the $514 million held outside the United States.
- How remaining acquisition earn-outs, transfer-pricing uncertainties, and future tax-accounting standards affect reported results and cash flows.